Summary |
This study borrows the idea of risk budget. First, the risk capital of the FHC is decomposed by its subsidiaries. The total risk capital then is assigned to each subsidiary based on the level of assumed risk. Two different dimensions exist for assigning risk capital: the pure risk dimension and the risk and return dimensions.
This paper demonstrates that Taiwanese FHC can reduce risk capital form 24.5227 standard units to 11.6955 standard units and achieve a 52.30 per cent diversification effect. Moreover, a similar Canadian study conducted by Panjer (2002) found a 56.08 per cent diversification effect.
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